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Saudi Aramco’s IPO will not save Kingdom

November 6, 2019

* Saudi Aramco approaches Petronas, Asian state oil producers on IPO  

Saudi Crown Prince Mohammed bin Salman (MbS) has staked his country’s future on selling a 5% stake in Saudi Aramco, the most valuable asset it has.

And it is his hope that this IPO will help finance the country’s turnaround making it less dependent on oil revenue.

It’s been trying to do this for three years and was ready to pull the trigger when the Houthi rebels in North Yemen pulled theirs and damaged major Aramco facilities at Ab Qaiq in August.

The IPO itself was off the table until next year but the Saudis have officially put it back on the table, submitting the necessary paperwork to make the sale.

What’s held up this IPO has been MbS’s insistence on a $2 trillion valuation while playing very coy about the company’s actual assets and reserves. It took a couple of rounds of failed book-runner commitments to finally get the Saudis to offer some glimpse at Aramco’s finances.

From Irina Slav at in March 2019:

Aramco has never published financial reports. Although there were assurances that it will start doing so ahead of the IPO, to date the latest entry on Aramco’s Corporate Reports page is from July 20 last year, and includes production figures for 2016. Last year, sources had told Reuters the company was planning to start publishing financial reports early this year, but this has not happened yet.

By April, Aramco finally produced financial numbers that were reasonably current and even Bloomberg was skeptical of this $2 trillion valuation. It certainly wasn’t true when oil prices were in the gutter below $40 a barrel in 2016.

The Aramco IPO is the lynchpin to MbS’s Vision 2030 plan to remake and upgrade the Kingdom’s economy away from just being a Gas Station in the Desert that buys U.S. weapons and wages regional wars through proxies.

But now that the paperwork has been filed and the IPO likely to happen we now have a bevy of financial research reports coming out with their assessments of it.

And the numbers are all over the place. Here they are via Zerohedge:

The source said BofA’s low valuation of the company is at $1.22 trillion with a high estimate of $2.27 trillion, the gap is enormous and has spooked some investors.

Goldman Sachs values Aramco between $1.6 trillion and $2.3 trillion.

Note that our suggested valuation framework is based on a long-term analysis, and it is not linked to a near-term assessment of the likely performance of the company’s shares,” Goldman’s pre-IPO report said.

Much of Goldman Sach’s valuation of the oil company is derived from an average oil price of $64.50 for 2019, and $60 per barrel from 2020 through 2023.

EFG Hermes has a valuation of $1.55 trillion to $2.1 trillion, several fund managers told Reuters.

Bernstein’s research deck valued Aramco around $1.2 trillion to $1.5 trillion.

HSBC, one of the lead underwriters of the IPO, values the oil company between $1.59 trillion to $2.1 trillion.

BNP Paribas, another bank playing a critical role in the IPO, values Aramco around $1.42 trillion.

These ranges are always wide as research analysts want to cover both low end and high end, so you want to show the sensitivity of assumptions,” one banker told Reuters.

But let’s back up here for a second and remember what MbS was originally selling, 20% of the company for $400 billion. Now it’s 5% of the company for likely between $65 and $75 billion at a $1.3 to $1.5 trillion valuation.

It’s not the company’s performance MbS is worried about. It is how much this IPO will bring the government in the form of dividends to pay for its operations.

Remember, the Kingdom is currently running a budget deficit of 6.5% in 2020, up from 4.7% for this year officially. That’s $50 billion next year alone.

Debt to GDP, which was just 1.4% in 2014 will rise to 28% in 2020.

Aramco needs to either raise production or get higher prices to stem this bleeding. Neither of these things are on the table in the near future.

The reality is that for the past few months the Saudis have bailed themselves out with a war premium on the price of oil through their own machinations, getting the U.S. to apply embargoes and sanctions on all of their competitor and picking fights with Iran and inviting attacks on their tankers and infrastructure to keep prices from collapsing amidst a global economic slowdown and oil glut.

Note in the valuation for Aramco above Goldman Sachs makes the case for $60 oil in 2020, that’s rich from where I’m sitting. Right now we’ve seen a temporary sell off in the U.S. dollar thanks to Brexit which has both the British pound and euro bouncing off recent lows.

That will not last and the U.S. dollar is still in a very bullish medium/long term posture. And a bullish dollar only happens here over Donald Trump’s dead body (and Twitter feed) or a collapse in global liquidity.

But, that’s not on the horizon right? Of course not. It’s not like the ECB and the FED haven’t gone full dove in the past nine months to get ahead of a dollar liquidity crisis that threatens to engulf the entire Western world or anything.


In the end whatever money Aramco raises from investors will be used to fund the Saudi government’s operational deficit over the next eighteen months to two years, maximum.

That’s not enough to save the country and remake the economy through reinvestment in its people. It doesn’t matter if, officially, the budget deficit is financed through debt and drawing down reserves while Aramco uses the money to invest globally in diversifying its portfolio.

The money pile is the money pile until the Kingdom begins accepting other currencies than the U.S. dollar and breaks the Riyal peg to the dollar.

Because that would free the country from the hamster wheel of overpaying for its domestic projects and transfer payments via social programs.

Against a backdrop of a stronger dollar thanks to illiquidity and a $74 trillion synthetic short against it can you really expect oil prices to maintain near $60, all other things being equal?

Of course not. Oil will get crushed in dollar terms just like nearly everything else as the dollar rises and other major currencies collapse with the merest hint of a crisis.

It’s taken coordinated effort of all the major central banks, unprecedented political pressure by Trump on the Fed and the destruction of the democratic process in the U.K. to arrest the dollar’s rise.

Even if there is short-term weakness in the dollar over the next few weeks/months, while we wait for the catalyst, only real reform by MbS, of the kind that will likely end his country’s cozy relationship with the U.S., will save the Kingdom he’s been positioned to lead for the next two generations.


From → World Watch

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